Supermarket Tesco has a struck a £600millon deal to sell its banking operations to Barclays with the bank taking over Tesco’s credit cards, loans and savings accounts. Does it reflect a wider trend of consolidation within the banking sector?

Under a 10-year exclusive agreement, Barclays will market and distribute credit cards, unsecured personal loans and deposits using the Tesco brand, as well as explore other opportunities to offer financial services to Tesco customers.

Tesco retains all other existing activities of Tesco Bank, including insurance, ATMs, travel money and gift cards, which it considers ‘capital-light, profitable businesses’ with a strong connection to its core retail offer.

Around 2,800 Tesco Bank colleagues working on banking products, including the senior management team, will transfer to Barclays as part of the deal. Completion of the deal and strategic partnership is conditional on court sanction and regulatory approval or non-objection, as is typical in the transfer of banking operations, with completion expected to occur during the second half of 2024.

The Tesco view

Ken Murphy, Tesco group chief executive, said: “Tesco Bank is a strong business that has helped millions of loyal customers to manage their money for more than 25 years.  As we look to the future, our aim is to be the best provider of financial services in the UK, with this strategic transaction and partnership with Barclays unlocking greater value for customers and for our business.

“By working with one of the UK’s leading banks, we can bring customers new and innovative propositions, which will continue to benefit from Tesco Clubcard’s unique insight and digital capabilities.

The transaction will also significantly reduce our financial liabilities, in turn strengthening our balance sheet and allowing us to focus on continuing to grow our core retail business.  I’m hugely grateful to our colleagues for their dedication and excellent service to our customers, and I’m confident that this new partnership approach will build on that success.”

The Barclays view

“This strategic relationship with the UK’s largest retailer will help create new distribution channels for our unsecured lending and deposit businesses,” said C.S. Venkatakrishnan, Barclays group chief executive. “We are able to bring our expertise in partnership cards developed over decades in the US to enhance further the highly successful Tesco Clubcard loyalty scheme.

“This partnership with Tesco is a further demonstration of the investment we continue to make in our UK consumer business. We are looking forward to working closely with the team at Tesco over the coming months to enable a smooth transition and, subject to completion of the transaction, we look forward to welcoming Tesco Bank colleagues and customers to Barclays.”

Who’s next?

Industry experts view Tesco’s banking sale to Barclays as a significant catalyst for anticipated consolidation within the UK banking sector.  With Tesco’s strategic decision to streamline its operations and focus on its core food business, analysts believe that other mid-sized banks may follow suit in reevaluating their non-core activities.

This move reflects a broader trend in the industry, as banks seek to optimise their balance sheets and bolster their competitive positions amidst ongoing market pressure. Rival UK supermarket chain Sainsbury’s recently announced a phased withdrawal from its core banking business. It wants all financial products offered in future provided by third parties – similar to the model it uses for its insurance providers.

According to reports, the Co-operative Bank and Coventry Building Society were also in recent talks over a possible merger of the two high street lenders.

Trend towards consolidation

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, suggests that Tesco’s decision to streamline its balance sheet by divesting its banking operations to Barclays aligns with a broader trend of consolidation within the UK banking sector.

“Tesco is streamlining the balance sheet, having parted ways with its credit cards, loans and savings operations. Doubling down on the core food business is a trend we’re seeing many of the grocers adopt, as they reduce exposure to non-core activities and get ready to win the price wars, which have been raging since cost of living pressures soared.”

Rob Hudson, head of international banking and payments at fintech FIS, commentsWe’ve seen a trend towards bank consolidation over the past year. The sale of Tesco Bank to Barclays may be one of several more in the months ahead, as higher interest rates put more pressure on funding costs and the more successful challengers find themselves cash rich.”

However, he warns that, amid consolidation, banks must strive to enhance customer experience and continue to innovate, ensuring that customers are not left with fewer choices.

“News about Tesco Bank and Barclays will leave customers questioning how they will be impacted,” he continued. “Among the banks’ key considerations will be to ensure that they can offer a smooth transition, particularly from a technological perspective, to ensure that customers notice minimal disruption.”

“Amid consolidation, banks must aspire to serve customers and enhance their experience, rather than give them less choice. Now is the moment for banks to look at their technology stacks to ensure that they can continue to serve and innovative for customers, and that they are able to pivot as the industry continues to shift around them.”

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